Strong profit growth in the auto sector has prominent strategists predicting a renaissance in American manufacturing sectors. Canada, unfortunately, is likely to be left out.
Ford Motor and Fiat SpA beat analyst earnings expectations in recent days and this comes as no surprise to former Merrill Lynch chief strategist Richard Bernstein, who now heads Richard Bernstein and Associates. In a recent white paper , Mr. Bernstein predicted a dramatic resurgence in U.S. manufacturing.
"There are many reasons why the U.S. manufacturing sector seems likely to gain market share. Our three main reasons are wages and productivity, energy costs, and political stability," he wrote.
Mr. Bernstein emphasizes that it is the rate of change in these metrics, not the nominal measure, that matters most to global manufacturers looking to invest in new capacity. For instance, U.S. wages will never be nominally lower than China's but, as is the case now, when China's inflation-adjusted wages are rising and U.S. wages are falling, a global corporation will be more interested in the United States.
Canada is arguably more stable than the United States politically – witness the fiscal cliff in Washington – and this is a clear advantage when attracting investment. The domestic economy is less attractive in the other categories.
Canada has abundant energy but unlike the United States where the switch from coal to cheaper natural gas is continuing, the costs for energy are not falling. Regrettably for the U.S. economy as a whole, U.S. wage growth has been abysmal, averaging less than 2 per cent year over year in non-inflation adjusted terms since 2010. In Canada, wage growth has been more volatile but well above U.S. levels. U.S. labour is cheaper and this represents a competitive advantage.
Canada has a very productive labour force by global standards but again the trends in terms of worker efficiency favour the United States. Labour productivity – output of goods divided by hours worked – continues to progress much faster south of the border. On a quarter over quarter basis, U.S. productivity has improved by 2.2 per cent on average since 1990, while Canada's labour efficiency has climbed by only 0.36 per cent on average.
Our proximity to the world's largest economy suggests that the Canadian economy will benefit from the same trends as the United States. In this case, however, if Richard Bernstein is correct and a American manufacturing renaissance is about to begin, Canada could very well be left behind.
Scott Barlow